Thursday, 3 April 2014

TweetAnother aspect
of the debate on devolving income tax powers to Wales was the concern expressed
by both the Shadow Secretary of State and the Lib Dems that it would lead to “tax
competition”.

I’m aware that
the Tories genuinely seem to believe that reducing income tax by a few pennies
in the pound would somehow attract hundreds or thousands of entrepreneurs to
live in Wales and to set up their businesses here, although I’m not aware of
any serious evidence which supports what looks like an axiomatic belief in the
virtue of low taxation rather than a coherent economic policy.And I’m aware that many business supporters
of devolving various taxes to Wales support it not out of any commitment to
devolution, but because they have a rather touching – and I suspect misplaced –
faith that the Welsh Government would respond by cutting all these taxes.

But that is all
just rhetoric.Any government which
wants to make significant cuts in some taxes would ultimately have to do one of
two things – either cut expenditure or else raise other taxes to
compensate.And it is the latter of the
two which exposes the real problem in any Welsh Government being able to make
any creative use of the proposed powers.

‘Proper’
governments – those which really have true responsibility for raising as well
as spending money – have a wide range of taxation weapons in their
armoury.They can cut some taxes and
raise others – or even abolish some and invent new ones – in order to change the
balance between the different types of taxation in use.The extent to which taxation changes actually
affect economic behaviour is an open question, but assuming for a moment that
they do, it is precisely the ability to tailor the overall tax regime to different
or changing circumstances which enables governments to influence economic
policy.

The problem
with all the proposals and debate currently is that only a very narrow range of
taxes is proposed to be devolved; and there is only one really significant tax
included in the proposal.It is hard to
see how devolving the power to vary the rate of income tax without being able
to amend other taxes correspondingly can do other than create a degree of tax
competition between the countries of these islands – which is part of what
makes the power difficult to use.

Ultimately, it
seems to me that those complaining about the dangers of tax competition are
really complaining about the limitations of their own policy.